Working Papers

Government Shows the Irrelevance of AussieMac

Treasurer Swan has announced that:

To reinvigorate the Australian RMBS market and support competition in mortgage lending, I will direct the AOFM to invest in AAA rated RMBS in two initial tranches of $2 billion each.

The government’s intervention in the RMBS market shows that we don’t need a GSE to support market liquidity.  Both the RBA and AOFM can perform this function, if deemed necessary.

I doubt an intervention of this size will do much to ease liquidity premia or see much pass through to retail mortgage interest rates.  But even allowing for some small pass through, all the government has done is marginally weaken the case for further reductions in the official cash rate by the RBA.  Whatever the AOFM giveth, the RBA will surely taketh away.

posted on 26 September 2008 by skirchner in Economics, Financial Markets

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If the AOFM didn’t spend this money, wouldn’t it go to the Future Fund? If so, to the extent this initiative had an impact, why seek to reduce the cost of debt for certain types of borrowing (residential housing) rather than lowering the cost of debt or equity for other purposes?

Posted by .(JavaScript must be enabled to view this email address)  on  09/29  at  01:32 PM

Indeed.  But why rely on the financial system to intermediate assistance to home borrowers.  Just cut a cheque to whoever it is you’re trying to help.  $4bn in direct assistance would go much further than a tiny subsidy passed through capital markets, especially after the non-bank lenders have taken their chop.

How about $4bn in rebates to buyers of newly built homes?

Posted by skirchner  on  10/01  at  05:45 PM

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